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A Winning Trading Tactic Centered Around The Dividend X-Date

|Includes: Cheniere Energy Partners, LP (CQP)

Conservative by nature, my investment portfolio consists primarily of high-yield fixed income preferreds, which I rarely trade, and in most instances keep until they are called away by the issuing company. However, during my time as a market investor, I experimented with a number of, what I term, trading tactics I developed to enhance my portfolio yield. The following tactic was the last developed and perfected, which I termed the Dividend Play. It's my favorite strategy simply because it's the safest, easiest to understand, and can work up to 90% of the time in a neutral or upwardly trending market. Consequently, I recommend against utilizing this strategy during a volatile or bear market. Furthermore, by paying careful attention to macroeconomics, domestic politics, and any recent news, headlines, and press releases concerning the company whose stock you are about to employ in this strategy, you can effectively increase your win-loss ratio by additional percentage points. I know because prior to this recent market madness, I traded this strategy 73 times, winning just under 98% of the time, netting an average of $350.00 per trade. Bull, You're thinking. No, it's not, and you will understand why after you've read and thoughtfully considered the simple beauty and rationality of this trading tactic.

After researching and charting numerous high quarterly dividend paying securities ( .35 or more), I determined that in most instances, more than 70% of the time, the market price of securities increased as they approached their all-important x-date. This does not mean that prices appreciated in a straight line. As is normal, their prices rose and fell, yet in most instances trended higher. Consequently, I would buy shares as close to their dividend declaration announcement as I could get. The reason for this urgency is that once the announcement is made, and that announcement signifies that the dividend will be maintained or increased, the stock price usually jumps nicely. Armed with this knowledge, I was determined to be right at the front of the line to receive this knowledge as quickly as possible after its announcement.

To my chagrin, in spite of diligent headline hunting and requesting e-mail notification of each company's press releases, I was, more often than not beaten to the punch, as indicated by price jumps, even before I received news of the dividend declaration announcement. It was at this time I had a critical decision to make. I could wait for the dividend declaration announcement before placing a bid or I could chose the more risky approach of anticipating the announcement date and by buying the stock prior to that date, thereby more fully take advantage of the announcement day jump in price. Obviously, the downside of this approach was that the dividend declaration might declare a dividend cut, or worse, a dividend suspension. This is just one of several reasons for not employing this strategy during a down market when dividend cuts are more likely to occur.

Preparation:

To accomplish my goal, I began making a list of those high dividend yielding and paying stocks I had previously traded and were familiar with. I added to this list with a visit to the Dividend Detective - Big Dividend Stock List web site, which lists the current top 100 dividend yielding securities.

Dividend Detective - Big Dividend Stock List

My completed list now contained approximately 50 companies, which I would trade utilizing this strategy. This allowed me approximately 200 yearly trading opportunities, or 4 quarterly x-dates for each of the 50 companies selected. Then, with my list complete, I opened one of my all-time favorite web sites, Dividend Investor.com

Dividend Investor.com

I love this site and use it often to research dividend yields, declaration dates, x-dates, payment dates, and historical performance of the securities I am interested in trading. Log onto this site with the URL I provided and follow my lead.

Let's review the information the opening page provides. On the left side of the screen type in the symbol of the company you want to research, type in CQP for this example, and hit enter on your keyboard. Now scroll down the page. You'll learn a bit about the company, its dividend yield according to previous day's closing price, which you'll find a bit further on down the page, and other information you might find useful. One caution, it's always best to do your own math and verify all information before acting upon it. This is true for this site as well as any other investment site you might visit. To continue, for our purposes we are most interested in the dividend declaration date, the x-date, and the historical record of the dividends paid.

Obviously, we like to see this amount rising or at least staying the same; however, for this strategy it's the next click of the mouse on the Dividends Paid Since button that will bring us to the information we are most interested in. It provided the historical record, over the past 5 years (more if you chose to pay) of declaration dates, x-dates, and payment amounts. Now you are ready to add some information to that list of stocks you've compiled. I prefer to utilize an excel spreadsheet, which I employ regularly for all my market calculations, and most significantly to track my investment history, including dividends received, portfolio trading history, and an accurate account of the exact dollars invested and earned since I began investing, once again, in August, 2008. For anyone interested, simply e-mail me at nroberts98@aol.com and I send you a return e-mail with an attached excel spreadsheet for you to download and use. It's contained in ms office 2003, and, as I gather, easily read by later incarnations.

Example of a past worksheet:

Back to Dividend Investors historical view: For the purpose of this strategy, what we are initially interested in is determining the approximate date the upcoming dividend declaration announcement. Therefore, I scan the declaration date column and concentrate on the present quarter's upcoming declaration date. I am writing this in September, 2010, consequently, I am immediately interested in the October declaration date. From the previous 4 years listed, I add the earliest and latest declaration dates to my spreadsheet, 10/18 - 21. This means that there is a good chance that the upcoming dividend declaration announcement will fall sometime between the eighteenth and the twenty-first of October. Now, do the same with the entire list of securities you've selected to trade this strategy.

Trading the strategy:

After completing my list, I created a spread sheet listing only those securities nearing their next anticipated x-date. It was from this spreadsheet that I would do the actual trading.

The first two columns I added were the most recent high and low market prices for each of the stocks I was prepared to bid on. I obtained this information from another of my favorites:

Yahoo Finance

Click on to the page and enter the symbol of the company you want to research, CQP for our purpose. This is a great site because of all the information it offers. I urge that explore this site at length to more fully benefit from the knowledge it has to offer. However, for our purposes, let's hit the Historical Prices button in the column on the left. From this list, we are interested in the past 2-week high and low price of the stock, which we will add to our spreadsheet, I've labeled D-play. As of this writing CQP's 2-week high and low were 16.17 and 13.06. You might also note that it's prices were trending down. In a neutral or moderately improving market, which are the markets we want to employ this strategy in, this won't be the case. Therefore, for our purposes, let's change that low price to a more normal 15.06.

CQP D-play Spreadsheet:

Consequently, the trading range over the past two weeks has been between 16.17 and 15.06. Therefore, my opening bid would begin at the low range of the two week span, at $15.06. I repeat this formula with all the other companies that I anticipate will soon be making their quarterly dividend declarations. To the above list, I now add the amount of my opening bid. I also log the last paid quarterly dividend amount for quick reference. One final adjustment to my D-play spreadsheet was that I order the stock symbols, not alphabetically, but according to when I believed the date of their dividend declaration will occur, earliest at the top. Then I watch and wait.

On several occasions, my low-ball bids were accepted and I fill in several additional columns with pertinent information. The cost or the price I paid for each share. Also the number of shares I was able to purchase. Not always the basic 1000 I bid on, which at times is halved to 500 because of the high price per share. As a rule, shares priced above $20.00 I bid for in lots of 500. Anything below I bid in lots of 1000, and if the price is really low, sometimes lots of 2000 shares. Upon successful purchase, I immediately place the 1000 shares for sale at one dollar above my cost, or for this example, 16.06. If the price of the stock increases by that dollar prior to the x-date, I have earned $1,000 less my $10.00 trading fees.

Because this is a hypothetical situation, for illustrative purpose, I am adding a hypothetical declaration date and x-date.

If list the price of the stock according to its price just prior to the declaration. If the declaration is made after 4:00 p.m., I use the day's closing price. If during the trading day I approximate the price according to when the press release was announced. Although it's not that important, I use it as a handy reference point.

With each purchase, I am able to figure my yield percentage, useful in my decision whether or not to keep the stock in the event I decided that keeping it and collecting the dividend is a more attractive alternative to selling it prior to the x-date. Remember, I am basically a long-term investor always seeking to enhance my portfolio. The above strategies are simply a way for me enhance my yearly earnings and further enjoy the game.

To figure the yield:

.425(quarterly dividend) X 4 = 1.70/15.06 (NASDAQ:COST) = 11.29% yield

An attractive yield worth considering.

It is now October 19, and the dividend declaration has been announced. Thankfully the .425 dividend amount has been maintained, and the x-date, also announced is set for November 3. I have 10 business days to sell the 1000 shares prior to the x-date. Furthermore, through exhaustive research, I have concluded that the day before the x-date is really not the optimal time to attempt the sale, in fact, more often than not; it's the day before the day before the x-date that has proven to be the best time to attempt the sale. I found this to be the case for two reasons. First in many instances higher prices are reached 2 days before the x-date, and secondly, if that day happens to fall on a market down day, I still have the opportunity to sell the shares on the following day under potentially more favorable market conditions. Therefore, I am allowing myself only 9 days to sell those shares for a maximal profit. Time for you to put on your thinking caps.

Trading for maximum profit within the D-play strategy:

To review, you have nine, possibly 10 business days to sell. Because you bought several days before the declaration, you benefited from an immediate bump of, say, .32. You can unload your shares for a quick $320.00 profit or you can hold a wait for further appreciation, which is normally the case. I choose to wait. The market is trending higher and I have nine days, plus one for insurance, to make a more profitable trade.

However, the next day turns out to be a very good day in the market with the Dow up substantially and the shares of CQP now .75 higher than when you purchased them. In this instance, for several reasons, I choose to sell and take the profit. The first because I believe a bird in the hand is worth two in the bush. I've locked in my profits on a quick jump that was at least partly due to the favorable market, which might not be so favorable tomorrow or the following days. Additionally, the company might issue a press release announcing the sale of several million additional common shares, which almost always drives down its price at least for a few days or more. Finally, because I still have plenty of time to trade this security, I sell my position and immediately place a bid in the neighborhood of my low-ball initial bid, hoping to repeat the process. Because the market and individual stocks never move in a straight line, and often move up and down along a parabolic curve, it makes it possible to buy low and sell high over a very few days. I have, on several occasions, been able to accomplish several trades of the same stock between its declaration date and x-dates at a very handsome profit. In fact, while watching the stock's movement, you'd be surprised how well you can gauge the bottom and top of the parabolic curve.

No, I haven't forgotten the downside when stuff happens. In those instances when market conditions, or bad company or sector news affects share price negatively, I always take a more detailed look at the company before making my final decision. Because I am a long-term dividend investor and because I purchased this company's stock at an attractive dividend yield, 11.29%, I might be inclined to add it to my portfolio. And don't forget the added benefit collecting $425.00 in dividends. However, if after careful review, I decided against keeping those 1000 shares, I'd attempt to sell them at what I believe is the most risk adverse opportune moment and suffer the loss, which with my trading record using this strategy is less than 15% of the time. Notice I claimed 15%, which you might claim is contradictory to my initial 98% success rate. Sorry, it isn't, simply because of the more risky strategy I chose to employ. Rather than making my initial bid on or just after the dividend declaration, I chose to approximate the upcoming declaration date and place a bid just prior to that expected date, hoping, rather than knowing whether or not the declared dividend will be maintained, increased, or reduced. Consequently, the greater risk/reward strategy utilized was the reason for the success rate percentage drop.

Here are a partial list of some of my favorite stocks with which I employ this trading tactic, simply because of their high quarterly dividend: PMT, CHKR, PER, EXLP, NMM, AMID, LRE, MCEP, MTGE, AI

Note: The above is just one of the strategies detailed in my book, The Dividend Investor's Guide, which is primarily devoted to accumulating a high-yield, low-risk, fixed income or preferred portfolio, which has served me equally well in bull and bear markets.

The Dividend Investor's Guide

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.